Microsoft wants a do-over with Windows Phone 8, but is it too late?

At a developer event in San Francisco yesterday, Microsoft previewed its upcoming Windows Phone 8 platform, which the company hopes to unveil in lock step with Windows 8 for ARM and Intel-based devices. Windows Phone 8 will mark a major step forward for the platform, shifting Windows Phone to the same underlying kernel and application development technologies used in the “real” versions of Windows, so developers will be able to leverage their Windows programming skills and tools to make mobile apps. Windows Phone 8 will also support a number of new technologies and form factors, so phone makers can put the mobile operating system on a broader array of devices — not just handsets, but probably some consumer-focused media tablets as well.

But Windows Phone 8 will come with some huge costs. For Microsoft, Windows Phone 8 essentially represents a “do-over.” That Windows Phone platform it was touting a year ago as able to challenge iOS, Android, and RIM with innovative devices? With Windows Phone 8, Microsoft is essentially kicking all that — and Windows Phone early adopters — to the curb. Folks who want to experience Windows Phone 8 will need to buy a new device to do it, and folks who embraced the existing Windows Phone platform have no options or upgrade path.

Is this any way for Microsoft to treat its customers and partners? Microsoft is gambling the benefits of Windows Phone 8 will smooth over any ruffled feathers. But will they be enough to make Windows Phone an actual player in the smartphone market?

Windows Phone 8 for consumers: Go buy a new phone

Folks who want to run use Windows Phone 8 will need to wait until new Windows Phone 8 devices are available. Microsoft hasn’t given a release date, but expect them to arrive in the last quarter of 2012.

Why a new device? No existing Windows Phone 7 devices will be upgradable to Windows Phone 8. None. Early adopters who have embraced Windows Phone devices like the new Nokia Lumia phones will have no choice but to abandon them in favor of new devices if they want to move to Windows Phone 8.

Windows Phone 8 devices will be able to run most apps for Windows Phone 7.5. However, existing Windows Phone 7 devices will not be able to run apps for Windows Phone 8.

It’s no secret that Windows Phone has been struggling to make inroads in the smartphone markets, with even Nokia’s much-touted Lumia smartphones barely generating consumer interest. IDC found that Windows Phone and Windows Mobile combined accounted for a mere 2.2 percent of the worldwide smartphone market in the first quarter of 2012. But even that small pool of Windows Phone users must be feeling like they’ve been given the old bait-and-switch. Anyone who was considering a Windows Phone yesterday is probably re-evaluating those plans today. Why buy a phone that Microsoft already says won’t be upgradable to the next version of Windows Phone, due in just a few months?

Windows Phone 8 benefits

So why would Microsoft toss the existing Windows Phone ecosystem to the curb with Windows Phone 8? So far, the company hasn’t outlined many consumer-facing new technologies for Windows Phone 8 — the information so far is mostly targeted at developers who will be building apps, devices, and services for the platform. But here are the big benefits:

Windows kernel — Windows Phone 8 will share the same Windows NT kernel as Windows 8 for Intel and Windows 8 RT. On one hand, this is a boon for developers since many of the same APIs and expectations they have for Windows will translate to Windows Phone. In many senses, they will become true Windows devices that are part of the broader Windows ecosystem. The flip side, of course, is that not everything in the Windows ecosystem is squeaky clean: The Windows kernel does have many years of real-world testing under its belt, but it means any kernel flaw impacting security on desktop versions of Windows could have ramifications for Windows Phone, too.

Expanded hardware support — With Windows Phone 7, Microsoft laid down some fairly restrictive hardware requirements for phone makers. Most industry watchers took that as a sign that Microsoft wanted to exert more control over the new ecosystem to help it better compete with the iPhone. Windows Phone 8, conversely, will support a broader selection of hardware and screens. Device makers will be able to support screen sizes like 480 x 800, 768 x 1,280, and 720 x 1,280 — Windows Phone 8 will also support multicore processors. That means Windows Phone 7 won’t be suitable just for phones: It’ll also likely find a home on media tablets and other devices that don’t need a full-blown Windows RT installation. Windows Phone 8 will also support storage on microSD cards.

Nokia Maps — In a significant boost for Nokia, Windows Phone 8 will also be ditching Microsoft’s own Bing Maps in favor of Nokia Maps. The move had been hinted for some time, but Microsoft only confirmed it with the Windows Phone 8 developer event. Windows Phone 8 will support all Nokia Maps features, including the offline mode and voice-based navigation.

NFC and Mobile Wallet — Windows Phone 8 devices will enable users to store credit-card and debit-card information securely in their devices, and support tap-and-go mobile payments and mobile banking using near-field communications (NFC). Microsoft will be enabling mobile payments via Isis, a joint venture of Verizon Wireless, AT&T, and T-Mobile. Isis has partnerships with Mastercard, Visa, Discover, American Express, and Barclay’s. The mobile wallet will also support daily deal offerings, and, like Apple’s forthcoming Passbook, support store membership and loyalty programs. Microsoft says it expects to begin offering mobile payment support via Isis at an unspecified time “next year.”

Internet Explorer 10 — Windows Phone 8 will also feature the desktop version of Internet Explorer 10. Mobile users will be protected by the same anti-phishing and other security technology built into Microsoft’s flagship desktop browser; it also means sites will look the same on Windows Phone 8 mobile devices as they do on desktop versions of Windows.

Enterprise support — Corporations and large organizations will appreciate being able to manage large fleets of Windows Phone 8 devices, including a built-in Company Hub app, Bitlocker encryption and Secure Boot technologies. Lack of enterprise management tools has been cited as an impediment to large corporations embracing Android. While enterprise management solutions exist, Android’s fragmentation means they don’t work across the board.

C and C++ — Developers will be able to code for Windows Phone 8 using C and C++. The languages themselves aren’t such a big deal, but support for them means developers will be able to tie into things like the Havoc Vision engine and other popular libraries, as well as do native DirectX-based game development.

Throwing Windows Phone 7 a bone

Microsoft isn’t completely throwing Windows Phone 7 under a bus just yet. The company has promised an update to Windows Phone 7.8 for all current Windows Phone 7.5 users. (If the process of updating to Windows Phone 7.5 is any indication, those customers may have to wait several months after Windows Phone 7.8 is released to see any update.)

The sole improvement Microsoft is bringing to Windows Phone 7.8 is a version of the start screen from Windows Phone 8. What’s new about it? Three sizes of live tiles instead of just two, and a new selection of theme colors. Users will also apparently be able to cram more live tiles into the home screen, with the apparent elimination of the right-side vertical strip. The idea is to enable Windows Phone users to customize their home screens to an even greater degree. The addition will no doubt be welcome to Windows Phone users — since the live tiles home screen is one of the truly distinctive features about Windows Phone — but is unlikely to be a game-changer.

Few of the announced technical changes in Windows Phone 8 come as huge surprises: Microsoft has been quietly signaling for months that Windows Phone 8 will be a “generational” change for the platform, and that developers will need to rethink their strategies. What is surprising, however, is that no existing Windows Phone devices will be upgradable to Windows Phone 8.

Nokia in a lurch

The answer leaves Microsoft’s hardware partners, particularly Nokia, between a rock and a hard place. Under the leadership of former Microsoft exec Stephen Elop, Nokia has essentially made an all-or-nothing bet on the success of Windows Phone, consigning its Symbian operating system to the dustbin of history. The company has seen its handset sales plummet — Samsung recently took over as the world’s largest handset manufacturer — and the company has been burning through cash reserves at an unsustainable pace, hoping its new Lumia line of Windows Phone products catch consumer interest and start turning the company around before it’s too late.

However, it may already be too late. All three major credit rating companies have now downgraded Nokia’s credit to junk status. The company is struggling to cut costs, recently announcing it will lay off another 10,000 employees by 2013. And Nokia’s revenue from its smartphone business was down 52 percent year-on-year during the first quarter of 2012. It even warned that its losses for the current quarter will be even higher than it estimated two months ago.

Who else makes Windows Phones? Mainly Samsung and HTC. However, those companies’ fortunes are more tightly tied to Android than Windows Phone . Only Nokia made the all-or-nothing bet. Nokia’s strategic partnership with Microsoft means the company has to have known that these changes were coming with Windows 8, and that its existing Lumia offerings were about to be cut off at the knees. Nokia says it has updates planned for its current Lumia products — possibly based on imaging technology just acquired from Scalado — but there’s no denying Windows Phone 7 is now an orphaned platform. And it’s all Nokia has to offer.

Nokia had hoped to begin its turnaround with its first Windows Phone devices released in time for the 2011 holiday season. The Lumia has failed to take off, and now, it looks like Nokia has to place its bets on Windows Phone 8 devices that should hit the market in time for the 2012 holiday season.

Microsoft reportedly considered acquiring Nokia in late 2011, just as its first Windows Phone devices were set to hit the market. Microsoft backed away from the idea once it got a look at Nokia’s books. However, since then, three things have happened:

Nokia’s stock price is at a 17-year year low, and currently off more than two-thirds since late October, 2011;

Microsoft introduced its own Surface tablets, going public with its intention to compete directly with its Windows OEM partners for the first time;